VZCZCXRO7762
OO RUEHCHI RUEHDT RUEHHM
DE RUEHML #3226/01 2140417
ZNR UUUUU ZZH
O 020417Z AUG 06
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2284
INFO RUEHZS/ASEAN COLLECTIVE IMMEDIATE
RUCPDOC/USDOC WASHDC IMMEDIATE

UNCLAS SECTION 01 OF 02 MANILA 003226 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
DEPT FOR EAP/EX AND EAP/MTS 
STATE PASS TO USTR FOR BWEISEL AND DKATZ 
USDOC FOR 4430/ITA/MAC/ SBERLINGUETTE 
USDOC PASS TO USPTO FOR PETER FOWLER 
 
E.O. 12958: N/A 
TAGS: ETRD EAGR ETTC EINV KIPR RP
SUBJECT:  A/S HILL'S MEETING WITH TRADE AND INDUSTRY SECRETARY 
FAVILA AND FINANCE SECRETARY TEVES 
 
REF: MANILA 03098 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION - PROTECT 
ACCORDINGLY 
 
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SUMMARY 
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¶1. (SBU)  In a breakfast meeting July 31 with Assistant Secretary 
Hill and the Ambassador, Philippines Finance Secretary Gary Teves 
and Trade and Industry Secretary Peter Favila expressed confidence 
in the Philippines' strong economic growth, improving fiscal 
situation, and solid cooperation between their two departments on 
key economic programs.  Fiscal reform measures are on track, but 
increased spending on much-needed infrastructure and social services 
will likely challenge balanced budget goals.  Favila expected the 
country could achieve 10% annual growth in investments and exports, 
even as the government seeks to rationalize its investment 
incentives.  Hill and Favila discussed the possibility of a US-RP 
Free Trade Agreement and agreed that a good first step would be to 
pursue sectoral trade agreements.  End Summary. 
 
¶2. (U)  Assistant Secretary Hill and the Ambassador met with Trade 
and Industry Secretary Peter Favila and Finance Secretary Gary Teves 
over breakfast on July 31.  Also joining from the GRP were DTI 
Undersecretary Elmer Hernandez and Finance Undersecretary Roberto 
Tan.  Both secretaries were optimistic about the Philippines' 
economic situation.  Favila said the exceptionally strong 
collaboration between both the Finance and Trade departments in 
addressing key economic issues and concerns is helping move the 
economy forward. 
 
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FISCAL SITUATION 
---------------- 
 
¶3.  (SBU) Teves said fiscal measures are on track for the year and 
he expects to achieve the President's budget deficit target of 2.1% 
of GDP (down from 2.7% of GDP for 2005).  Favila said the 
President's original target for a balanced budget by 2010 has now 
been pushed forward to 2008.  To achieve this goal, Teves said the 
government must maintain fiscal discipline while stepping up 
spending on social services and infrastructure. 
 
¶4.  (SBU)  Favila said infrastructure spending needs to increase to 
at least 5% of GDP to finance the major new infrastructure 
initiatives outlined by President Arroyo in her State of the Union 
Address (reftel).   Teves said this increase would necessarily 
reduce other spending or require a continuing budget deficit.  Hill 
said the GRP must increase infrastructure spending to compete for 
investment with other countries in the region. 
 
¶5.  (SBU) Teves said he was pleasantly surprised at the level of 
public interest in the Millennium Challenge Program, signed July 26. 
 He added "we need to make sure we do well."  Hill commented that 
President Arroyo's prompt decision to match the $20 million grant 
demonstrated the GRP's commitment to a successful program. 
 
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INVESTMENT CLIMATE 
------------------ 
 
¶6. (U) Favila said he is confident the Philippines can achieve 10% 
annual growth in both investments and exports.  Teves and Favila 
jointly conducted a series of "economic roadshows" over the last 10 
months meeting with potential investors to attract additional 
investment.  During their first roadshow to New York and London in 
October, Teves said investors were skeptical, but subsequent 
roadshows found investors more enthusiastic due to increasingly 
positive economic and fiscal indicators.  Favila said he also wants 
to place trade offices overseas in target countries but needs 
funding.  Favila added the U.S. is "always our number one partner," 
but we need to branch out and attract more investment from other 
countries. 
 
¶7.  (U) Favila said current investors are happy about people, but 
not about contracts.  Investors are attracted to the Philippines' 
low-cost, high-quality labor, but the GRP is concerned about the 
country's long-term ability to supply an adequate labor pool, 
particularly given concerns about declining English language 
proficiency.  The most frequent complaint, he said, is the lack of 
contract integrity and the need to fight lengthy court battles with 
often undesired results.  Finance Undersecretary Tan said his office 
 
MANILA 00003226  002 OF 002 
 
 
is receiving positive feedback from bankers who are happy about the 
improving fiscal situation, aided by the recently improved outlook 
of the Philippines' credit rating from negative to stable. 
 
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RATIONALIZATION OF INVESTMENT INCENTIVES 
---------------------------------------- 
 
¶8.  (SBU) Favila said the GRP needs to focus on improving 
macroeconomic fundamentals, which will ultimately strengthen the 
economy and the investment climate.  One measure is to rationalize 
the current package of investment incentives offered to investors, 
which President Arroyo alluded to in her State of the Nation 
Address.  Favila said the current incentives package, based on 
decades of various laws, needs to be reviewed. 
 
¶9.  (SBU) Undersecretary Hernandez said the GRP basically looked at 
two options:  continue to offer the current incentive program at the 
cost of needed revenues or judicially manage the incentives program 
in order to build a stronger economy in the long-term.  Investors 
ultimately want the stronger economy, Hernandez said.  When Favila 
met with the American Chamber of Commerce, members expressed 
concern, but most understood the GRP's rationale. 
 
¶10.  (SBU)  Both Favila and Teves emphasized that their departments 
are jointly working on the incentives rationalization plan and are 
coordinating closely with Senator Ralph Recto on the legislation. 
They are also consulting with the World Bank.  Teves said they want 
a reasonable but competitive package that considers the fiscal 
situation.  Favila said the GRP will improve non-fiscal incentives 
such as ease of doing business and cutting through government 
bureaucracy.  DTI is working to set up a pilot program with the city 
of Davao on the island of Mindanao. 
 
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INTELLECTUAL PROPERTY RIGHTS 
---------------------------- 
 
¶11.  (SBU) Favila expressed appreciation to Embassy Manila and to 
the U.S. Patent and Trademark Office for arranging an individualized 
training program on intellectual property rights (IPR) for 
Intellectual Property Office Director General Adrian Cristobal. 
Favila said the GRP has much to learn.  In particular, it needs to 
convict more IPR violators, which Favila said is a big challenge. 
In a meeting with the Chief Justice of the Supreme Court, Favila 
said it was clear the regular courts are not conversant on IPR 
issues. 
 
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US - RP Free Trade Agreement 
---------------------------- 
 
¶12.  (SBU) Favila asked Hill about the possibility of a US-RP Free 
Trade Agreement (FTA) in the near future.  He said the GRP is about 
ready to sign an FTA with Japan (the Japan-Philippines Economic 
Partnership Agreement) and that the first question the Philippine 
Congress will ask when it goes through is "what about the U.S.?" 
Hill said we should work to maximize bilateral trade opportunities 
but suggested sectoral trade agreements may be more realistic in the 
near-term.  Favila agreed. 
 
¶13.  (U) A/S Hill did not have an opportunity to clear this message 
before departing post. 
 
KENNEY